Working Paper: NBER ID: w10543
Authors: Daniel Bergstresser; Mihir A. Desai; Joshua Rauh
Abstract: Managers appear to manipulate firm earnings when they characterize pension assets to capital markets and alter investment decisions to justify, and capitalize on, these manipulations. We construct a measure of the sensitivity of reported earnings to the assumed long-term rate of return on pension assets. Managers are more aggressive with assumed long-term rates of return when their assumptions have a greater impact on reported earnings. Managers also increase assumed rates of return as they prepare to acquire other firms and as they exercise stock options, further confirming the opportunistic nature of these increases. Decisions about assumed rates of return, in turn, influence asset allocation within pension plans. Instrumental variables results suggest that a 25 basis point increase in the assumed rate of return is associated with a 5% increase in equity allocation. Taken together, these results suggest that earnings manipulation arising from managerial motivations influences significant managerial investment decisions.
Keywords: Earnings manipulation; Managerial investment decisions; Pension accounting; Pension assets; Corporate governance
JEL Codes: M41; M52; G23; G30; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| assumed rates of return on pension assets (H55) | reported earnings (E01) |
| reported earnings (E01) | managerial investment decisions (G31) |
| assumed rates of return on pension assets (H55) | managerial investment decisions (G31) |
| pension sensitivity (H55) | long-term return assumptions (G17) |
| option exercise (G13) | return assumptions (D84) |
| assumed rate of return (G17) | equity allocation (G11) |
| acquisition activity (G34) | assumed rates of return on pension assets (H55) |